The Covid-19 pandemic will directly impact economic activity in India due to lockdowns and second round effects operating through a severe slowdown in global trade and growth, cautioned the Reserve Bank of India (RBI) in its Monetary Policy Report (MPR).

While efforts are being taken on a war footing to arrest its spread, the report assessed that Covid-19 will impact economic activity in India directly through domestic lockdown. Second round effects will operate through a severe slowdown in global trade and growth, it added.

“More immediately, spillovers are being transmitted through finance and confidence channels to domestic financial markets.

“These effects and their interactions will inevitably accentuate the growth of slowdown, which started in Q1 (April to June) of FY19 and continued through H2 (October to March) of FY20,” the report said.

The report observed that apart from the continuing resilience of agriculture and allied activities, other sectors will be adversely impacted by the pandemic, depending on its intensity, spread, and duration.

Inflation and growth

“Relatively modest upsides are expected to emanate from monetary, fiscal and other policy measures, and the early containment of Covid-19 if that occurs. Such uncertainties make the forecasting of inflation and growth highly challenging,” the RBI said.

At the same time, the report emphasised that significant monetary and liquidity measures taken by the RBI and fiscal measures by the government will mitigate the adverse impact on domestic demand and help spur economic activity once normalcy is restored. However, Covid-19 hangs over the future like a spectre, it added.

Against this backdrop and the highly fluid circumstances in which incoming data produce shifts in the outlook for growth on a daily basis, the MPR underscored that forecasts for real GDP growth in India are not provided here, awaiting a clear fix on the intensity, spread and duration of Covid-19.

While headline inflation has peaked and vegetable prices are on the ebb, the RBI observed that the impact of Covid-19 on inflation is ambiguous relative to that on growth, with a possible decline in the prices of food items being offset by cost-push increase in the prices of non-food items due to supply disruptions.

Headline inflation had stayed above the upper tolerance band of the inflation target band between December 2019 and February 2020, led by a spike in vegetable prices.

Taking into account the initial conditions, signals from forward-looking surveys and estimates from time series and structural models, CPI (consumer price index) the RBI said inflation is tentatively projected to ease from 4.8 per cent in Q1 (April to June) of FY21 to 4.4 per cent in Q2 (July to September); 2.7 per cent in Q3 (October to December); and 2.4 per cent in Q4 (January to March).

This projection comes with the caveat that in the prevailing high uncertainty, aggregate demand may weaken further than currently anticipated and ease core inflation further, while supply bottlenecks could exacerbate pressures more than expected.

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